Credit Agricole addresses the puzzling scenario where the USD is gaining across the board despite prevailing risk-on market conditions. Traditionally, the USD, as a safe haven, rallies during periods of tighter global financial conditions impacting risk sentiment negatively. However, despite an uptick in US rates and yields following the Fed's pushback against dovish market expectations and a surprisingly strong January NFP report, global stock markets have remained near multi-year highs. This resilience is attributed to recent positive global data surprises, bolstering confidence in the global economy's ability to navigate through monetary and credit constraints and ongoing geopolitical tensions.
Resilience of Risk Sentiment: The disconnection between the traditionally inverse relationship of the USD to risk sentiment is noted, with global equities maintaining strength despite higher US rates and yields.
Global Economic Strength: Positive data surprises globally are enhancing the belief that the global economy is robust enough to withstand various challenges, contributing to sustained risk appetite.
USD as a High-Yielder: The perspective on the USD is shifting towards its appeal as a high-yielding currency rather than solely as a safe haven, potentially leading to increased purchases of the USD by investors.
Implications for Currency Gains: This evolving sentiment suggests that any forthcoming USD gains may be more pronounced against low-yielders like the CHF and even the EUR, as investors seek yield in a resilient global economic environment.
Credit Agricole suggests that the current market dynamics, where the USD strengthens amid risk-on conditions, reflect a shift in investor sentiment towards valuing the USD for its yield potential in a globally resilient economic landscape. This adjustment in perspective could lead to more pronounced USD gains against lower-yielding currencies, highlighting a nuanced understanding of the interplay between risk sentiment, monetary policy expectations, and currency market movements.